The impact of a no-deal Brexit could be alleviated if policy was in place to ease the transition, NIESR has suggested.
Photograph: Sean Smith/The Guardian

Britain could avoid slumping into a recession in the aftermath of a no-deal Brexit, according to one of Britain’s leading economics forecasters.

The National Institute of Economic and Social Research (NIESR) said the blow to the economy from a disorderly departure from the EU could be softened by contingency plans being put in place by the government and by Brussels. Ministers could also reduce the impact with tax cuts and additional public spending, further limiting the damage.

Britain’s oldest independent economics research institute – in forecasts likely to embolden Brexit supporters urging Theresa May to pursue a “managed no-deal” – said that economic growth would come close to zero in the first two years after a no-deal Brexit. However, it would avoid the recession that has been forecast by some experts.

Although warning that every Brexit outcome would still be worse for the UK economy than remaining in the EU, it said there was sufficient headroom for the government to stabilise the economy in the short term.

“Were the UK to exit the EU without a deal in March, we would expect a sharper slowdown in economic activity than in the central case,” NIESR said in a report published on Wednesday, adding: “How much the economy responds would depend on the extent to which policy steps in and eases the transition.”

While some measures have been proposed by both Britain and the EU to offset the impact of a no-deal scenario, many analysts warn that time is running out and that they may not be agreed upon in time.

Although a recession would be avoided under the no-deal scenario put forward by the NIESR, GDP growth over the long run would remain below the level forecast should the prime minister secure a deal with Brussels. It also said it was still its central estimate that a deal could be agreed, leading to growth of about 1.5% this year.

However, offering a possible route-map for a no-deal scenario, the NIESR analysis said that additional support could be put in place by ministers and the Bank of England to curb the short-term impact to the economy.

Interest rates could be held steady at the current level of 0.75%, rather than raised, while measures could be taken to provide direct support to household income, including income tax cuts and higher benefits payments.

Such interventions would, however, come with a cost. The NIESR report said unfurling such a package could add as much as £60bn to government borrowing by 2023-24. It also warned that inflation could accelerate, eroding real wages and acting as a brake on the economy in future.

Amit Kara, head of UK macroeconomics at NIESR, said: “All this is not to say there will not be long-term economic costs. Those costs remain intact. These are just mitigating measures.

“Whilst it does make headlines or sensational news to suggest the economy will go into recession or not, I don’t think economists have the tools to be that precise. The big picture is I think there really will be a material slowdown,” he added.